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The good versus bad debt

Let me share my philosophy on debt.  Many experts often recommend paying for everything in cash, never to use credit cards, and tell you not to buy anything unless you have the money to pay for it in cash.  

A smarter way to benefit from debt

So for my wife and I, the only debt we currently have is a mortgage.  You might wonder that if we are millionaires, why don't we just pay off our mortgage, as many advisers suggest?  Well, this is the reason: our mortgage interest rate is just 3.5% for another 21 years, while the average return in the stock market is about 8%.  In other words, a bank is giving us liquidity so that we can make an extra 5.5% interest by simply being responsible.

You can apply the same logic for any debt that has a relatively low rate of interest.  So, if a car comes with 0% financing, unless you can negotiate a much lower price (rather hard to do with those car dealers), it is much better to take that free money, rather than pay it all in cash.

A similar smart strategy to use credit cards

I have two $0 fee credit cards that I have had for nearly 20 years (the longer you keep an account the higher your credit score is going to be).  But the card that I use the most is the Chase Sapphire Reserve that has an annual fee of $550.  Yes, that is a lot of money to pay but I never really pay it.  The card is designed in such a way that with all the credits that they offer, you actually get money from them.  For example, by charging nearly all our expenses, we collect points that are worth 50% if used for travel.  Since we do travel a few times a year, we actually end up collecting about $500 a year from Chase.  How awesome this deal is?  Not only do we not pay that $550, Chase actually ends up giving us an extra $500 a year, and some perks are even difficult to account for.  As an example, when we travel, the card allows us access to airport lounges and free meals in most major airports in the world.  Depending on the number of trips it can add up to hundreds of dollars and it is so much more comfortable to wait in a premium lounge with free food and alcohol and much better bathrooms and waiting area.

Bad debt: credit cards, payday loans, buy-now-pay-later (BNPL) loans, etc.

We never carry a balance on our credit cards.  Yes, we do not buy what we cannot pay in cash right away, but we simply do not pay for it in cash.  Instead, we use a credit card to collect the miles/points.  In general, payday loans also have very high interest rates and if you do not pay your BNPL, it can end up costing you a lot as well.

Now, I can understand that if you are young and starting out, you may not have the financial cushion that we do, but work on it.  By doing things like combining your finances as a couple, getting married rather than living together, cooking most meals at home rather than dining out, not having subscriptions like Amazon Prime, owning a home rather than renting, hanging on to electronics as long as possible, and having just one car rather than two particularly if you can work from home, you can do what we do.

There is nothing wrong with debt as long as it works to your advantage.